Tesla Shareholders: The Worst Is Behind Us

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An employee speaks with a customer at the Tesla Inc. showroom in Newport Beach, California, U.S. Tesla Inc. reached a milestone critical to Elon Musk's goal to bring electric cars to the masses -- and earn some profit in the process -- by finally exceeding a long-sought production target with the Model 3. Photographer: Patrick T. Fallon/Bloomberg

For the past two years, the key question for Tesla investors was whether the company could produce enough cars to be profitable. There was never a question of demand because so many people put down a deposit on a Model 3. The other car companies can only wish they had such problems. Today, the production question was put to rest.

Here’s how it works: The production line is run at maximum output, building cars at a rapid rate and then it’s shut down to inspect the vehicles for any flaws. The manufacturing process is then retooled to fix any problems that have been uncovered after which the production line is turned back on, and it's running at full capacity again.

Production may be slow for the first few months, but once a flawless run has been achieved, you can expect an instantaneous ramp-up, not a slow gradual one.

In the last week of Q2, Tesla hit its production goal of 7,000 cars per week including 5,000 Model 3s, an annual rate of about 350,000 cars.

Elon Musk said Model 3 production will increase to 6,000 per week in the next few quarters and 10,000 per week soon after that.

To put this in perspective, Tesla’s annual deliveries since 2012, in round numbers are: 2,650, 22,300, 33,000, 50,000, 84,000, and 101,000 (2017). In the first half of 2018, Tesla delivered over 70,000 cars.

The production ramp-up has taken longer than we expected, but it appears that the worst is behind us. When Tesla fixes the bugs that turned up, we expect production to continue to ramp-up quickly towards the annual goal of 500,000.

In an industry with high fixed costs, ramping production is the key to reducing the manufacturing cost of each car. Going from 101,000 cars in 2017 to an annual rate of 350,000 cars in the second half of 2018 is going to make their financials look a lot better, perhaps even profitable!

Tesla was at $280 in May when it didn’t look like they could make 5,000 Model 3’s per week. That turned out to be a good entry point. The stock closed at $301 today, but is trading at $329 after-hours.

I’m sure it was not his intention, but Elon Musk created a good entry point just last week when he asked suppliers for a refund. The stock promptly fell from $350 to $300 on the news.

I am the CEO and founder of Marketocracy, Inc.,and portfolio manager at Marketocracy Capital Management, LLC. My firm maintains a database of the world’s greatest “unknown” investors. I require these “Marketocracy Masters” to outperform the S&P 500 for a minimum of 5 ye...